Question

The City of Chicago has decided to bid for the 2030 Winter Olympics, and they have come to you to decide how much they should bid! The city believes that the games will increase the city's economic activity in the future due to increased tourist spending, hotel stays, etc. Assume a 5% interest rate for this question.

In the year 2029 the city believes it will receive $8 billion in increased economic activity. What is the present value of this benefit?  Round to nearest dollar. (Hint: it is currently 2020.)

The city believes it will receive $12 billion in increased revenues in 2030. What is the present value of these benefits?  Round to the nearest dollar

Answer 1

Assume current year is 2020

Interest rate = 5%

Present value can be calculated as: [Future value / (1 + Rate of Interest)^^Years]

1) If 2029, they will receive $8 billion in increased economic activity.

Year = 9

Present value = [$8 billion / (1 + 0.05)^⁹] = $5.2 million

2) It will receive $12 billion in revenes in 2030

Year = 10

Present value = [$12 billion / (1 + 0.05)^¹⁰] = $7.4 billion

Chicago can bid $5.2 billion + $7.4 billion = $12.6 billion for 2030 Olympic.